A Legal Analysis of the Phoenix Coyotes Situation

I am a licensed attorney in the United States. I specialize in contracting disputes and contract litigation. I am not an expert on bankruptcy, but I do have a working knowledge of the subject.

Below is a quick legal analysis of the situation facing the Coyotes, their current owner Jerry Moyes, the NHL, and the fans in Phoenix and southern Ontario. The conclusions are purely my own speculative assessments and not intended to be used as legal advice of any sort. Some if it may be a bit dense, but for those interested, I hope it is informative.

As everyone knows by now, Jim Balsillie has engineered a daring backdoor bid to buy the Phoenix Coyotes and relocate them to southern Ontario.

This effort attempts to circumvent the rules of the NHL by taking Gary Bettman and the Board of Governors out of the decision-making equation.

While Balsillie’s tactic is perhaps reflective of the same “enterprising” spirit that led him to his fortune as the CEO of Research In Motion and the mastermind behind the Blackberry, when matters such as this become tied up in the judicial system, the rule of law will ultimately decide what Balsillie can or cannot do.

There are two distinct legal hurdles at play in this melodrama—the authority to declare bankruptcy, and the authority of a court to compel the relocation of an NHL franchise.

Bankruptcy Authority

Jerry Moyes is the owner of the Phoenix Coyotes. He declared bankruptcy on behalf of the Coyotes on May 5, 2009.

Under normal circumstances, the owner of a business has the authority to declare Chapter 11 bankruptcy reorganization. The inner workings of a Chapter 11 filing are extremely complicated but largely irrelevant for the purposes of this article other than to note that the owner of the business maintains the right to conduct a bankruptcy sale, but such a sale is supervised—and must be ultimately approved—by a special bankruptcy court.

The NHL now disputes Moyes’ authority to file for bankruptcy. According to the league, when the Coyotes took a significant loan from the NHL in April (and likely on multiple occasions prior to April), Moyes agreed to forfeit his right to declare bankruptcy on behalf of the team in exchange for the cash.

If the NHL has its way, this promise will be deemed to be part of the loan contract between the NHL and the Coyotes, and Moyes will be barred from violating the deal.

But there are significant questions about the viability of a promise not to declare bankruptcy. While a contract is a contract, courts have long recognized the right of a contract participant to breach the contract, so long as they are willing to live with the consequences and pay financial damages. This is called the rule of the "Efficient Breach."

The only exception to the rule of "efficient breach" is when a court determines that there is no way to assess damages. In this setting, damages are easily valuated—the amount of loan money Moyes accepted from the NHL.

Prior to making the loan, Moyes had full authority to declare bankruptcy. The only thing that has changed now is that he took a loan. The NHL is forced into a difficult position of arguing that the promise not to declare bankruptcy is worth more than the loan itself (plus whatever interest was agreed upon).

While such questions are never cut and dry, based on the evidence currently available, I believe it is unlikely that the NHL will be able to convince a bankruptcy judge that Jerry Moyes has permanently and completely forfeited his right to manage the team he owns when it comes to filing for bankruptcy.

Undoubtedly, they can declare damages, but they would only be able to do so in form of a bankruptcy creditor, and would be repaid from whatever funds are collected as a result of the bankruptcy sale.

The Viability of the Balsillie Bid, and the Court’s Ability to Accept It

In tandem with Jerry Moyes' Chapter 11 filing, Jim Balsillie provided the court with a $212.5 million bid to buy the team, conditioned on his being able to relocate the franchise to southern Ontario. It is widely believed that nobody else will come within $50 million of Balsillie’s bid—and perhaps not even within $100 million.

If Moyes’ bankruptcy filing is deemed valid over the NHL’s objections—as I have speculated above that it will be—the next question is whether the bankruptcy court can and/or must accept the Balsillie bid.

In normal Chapter 11 bankruptcy settings, the court will only approve of the sale to the highest bidder. Because it is extremely unlikely that anyone is going to outbid Balsillie, for the sake of this article, we are going to assume he is the definitive high bidder.

Thus, the obvious snap conclusion is that the court is going to have to accept the Balsillie bid, and the Coyotes' days in Arizona are numbered.

Not so fast, my friend!

The bankruptcy court has no authority to order Gary Bettman and the NHL Board of Governors to approve the relocation of an NHL franchise. The NHL is a private entity, and because they are not directly a party to the bankruptcy sale (only Moyes and the bidders are), the court cannot tell the NHL what to do.

This matters because the Balsillie bid is a conditional contract offer. Instead of making a bid and stating his intention to move the team down the road, he has made his offer but said that he will only pay the money if he is allowed to move the franchise.

Under the law of contracts, a conditional offer is very different from a plain offer. A conditional contract cannot be accepted unless the condition is agreed to. If Moyes (or the bankruptcy judge) tries to accept the $212.5 million bid without the relocation condition, that contract will be deemed legally invalid, because Balsillie never agreed to offer $212.5 million for the team absent the right to relocate.

Given the conditional nature of the offer and the court’s limited authority over the NHL, it appears that the Balsillie bid is not really a bid at all—at least, not a legally viable bid. Were any other bidder to step in and offer a lesser sum for the team, and do so without conditions, the court would be compelled to accept the lower bid.

This explains why Gary Bettman has been scrambling to try to put together a bidding group headed by Chicago Bulls and White Sox owner Jerry Reinsdorf.

All this said, if Balsillie feels like gambling, he could opt to cut his offer significantly and remove the condition, thereby securing his rights to own the team. Once he takes over, then he could wage an Al Davis-like anti-trust war with the league to move his franchise.**

Such an effort would be expensive, time-consuming, and not guarantee success. But it could end up working out—and it may be Balsillie’s only option.

Conclusion

It is unlikely that a bankruptcy court will allow the NHL to block Jerry Moyes from filing for bankruptcy. However, once in bankruptcy, it is highly improbable that Jim Balsillie’s conditional offer can and/or will simply be accepted by the bankruptcy court without considering the NHL's self-determination rights.

Accordingly, it is likely that the Phoenix Coyotes will remain in Phoenix for the relatively near future, regardless of who the next owner is.

For fans in Phoenix, you are rooting for the NHL to successfully generate a condition-less offer from someone willing to keep the team in Arizona.

For the folks of southern Ontario, your best bet is to hope Balsillie decides to revamp his offer, remove the condition, and buy the team anyway. Once he does, you can safely assume that he will go to the ends of the Earth to try to get his franchise relocated.

- - - -

**A couple hours after publication of this article, it was brought to my attention that there is a third possible option: the Bankruptcy Court could decide to consider the relocation dispute at the same time it decides on which bid to accept.

In other words, the Court could determine that any future effort to block the relocation of the team would be an illegal anti-trust violation, and therefore decide that the condition in Balsillie's bid is no longer a hurdle to accepting it. If it would be illegal for the NHL to block the relocation, then the court can accept a bid predicated on that relocation without violating the rights of the NHL to govern its franchises.

It is up to the bankruptcy judge whether or not he/she will consider both issues simultaneously. Therfore, it is hard to predict how likely this third scenario is. However, this is probably what Jim Balsille is hoping for.

This option would allow Balsillie to avoid the risk of buying the team then fighting the NHL to move it. If he wins the relocation dispute, the practical effect is minimal. But if he loses, he can find that out before sinking a ton of money into an unhealthy franchise in a city he doesn't care to be in.